Raising the eyebrows of Chevron shareholders is a new report on the financial and operational risks to the company over its $18b legal liability for illegal dumping of toxic waste in the Ecuadorian Amazon rainforest. It warns investors about “misleading” disclosures made by Chevron’s management about the “significant risk” the liability poses to the company’s business and value.

Noted shareholder risk analyst Simon Billenness and shareholder-rights attorney Sanford Lewis authored the independent report, entitled “An Analysis of the Financial and Operational Risks to Chevron Corporation from Aguinda v. ChevronTexaco.” It was released as Chevron prepares for a May 25th annual meeting where shareholders are expected to voice their concern about Chevron’s handling of the lawsuit.

Billenness and Lewis write:

“While Chevron has admitted in sworn legal statements that the company is at risk of ‘irreparable injury to [its] business reputation and business relationships’ from potential enforcement of the Ecuadorian court’s judgment, the company has failed to characterize these risks to the company in its public filings and statements to shareholders.”

For example, the report describes Chevron’s assertion in its 10-K SEC filings that Ecuador’s courts “lack jurisdiction over Chevron” as “misleading” based on the company’s failure to disclose that the U.S. Second Circuit Court of Appeals has ruled that Chevron “assured the district court that it would recognize the binding nature of any judgment issued in Ecuador…As a result, that promise, along with Texaco’s more general promises to submit to Ecuadorian jurisdiction, is enforceable against Chevron in this action and any future proceedings between the parties.”

Nell Minow, a leading expert on corporate governance and investing, reviewed the report and found it “hard to dispute … that the company’s admissions about its liability risks in court documents are inconsistent with its financial reports and that its legal and public relations strategy poses an unacceptably high risk.” See her article here.

Meanwhile, Robert Kropp, a financial writer for Socialfunds.com, reported that “Trillium and its co-filers are preparing an Investor Statement, in which the company's failure to negotiate a settlement in the lawsuit raises questions about its ability to manage risks associated with environmental and human rights issues. Echoing the findings of Billenness and Lewis, it calls on the company to provide full disclosure of the risks associated with enforcement of the judgment in Ecuador.” Read his article here

Billenness and Lewis also criticize the Chevron board of directors for their failure to fulfill their duties to oversee management and respond to shareholder concerns regarding the Ecuador liability. According to the report, the board has been “unresponsive” to approaches by shareholders to discuss concerns regarding managements and quantification of the Ecuador litigation’s risk and liabilities.

“These choices may lead some investors to question the adequacy of the company’s public statements and disclosures and whether the board and management are fulfilling their fiduciary duties to properly manage this significant risk to the company’s business and value,” the report concludes.

The 2011 report is simply the latest in a long series of concerns expressed by shareholders over the company’s management of its environmental liabilities in Ecuador. As early as 2003, shareholders filed the first in a series of shareholder resolutions on the issue, culminating in a 2010 shareholder resolution asking Chevron to nominate an independent board member with a “high level of environmental experience” to oversee the company’s environmental actions, including the Ecuador liability.

Despite efforts by Chevron’s management to defeat the 2010 resolution and to downplay the environmental liability in Ecuador, the resolution garnered the support of more than 25% of the outstanding Chevron shares, equal to approximately $38 billion in shareholder value. Typically, any shareholder resolution opposed by management that gains more than 10% of shareholder support is considered a success.